Trends Driving the Slowdown in Global Supply Chain GrowthARTICLE

By Karen Lynch

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The slowdown in international trade growth and global supply chain expansion since the 2008 financial crisis continues to generate debate about the causes and implications for businesses. Experts offer a wide range of differing viewpoints: some believe that we have entered a new age of “deglobalization,”1 while others suggest that globalization has slowed but is not in retreat,2 or that the signals are mixed.3 International business decision-makers are scrambling to interpret and adjust to the changing environment, according to a July 2017 report in the Harvard Business Review (HBR).4

Global Supply Chain Growth Reaches a Plateau

Until recent years, global supply chain expansion has been a key driver of growth in international trade, especially in manufactured goods, according to the Bank for International Settlements (BIS). In fact, much of global trade is actually the cross-border flow of intermediate goods and services within global supply chains. The raw materials, parts and business services that go into the production of a final product account for almost two thirds of total global trade, according to a BIS report.5

As a result, over half of all exports, measured by value, cross a border at least twice before reaching the end-customer, according to a report in The Economist. Nevertheless, “as impressive as the share of trade accounted for by cross-border supply chains is, it has stagnated since 2007,” the report says.6

Among large multinational corporations, which run some of the largest global supply chains and account for much of international trade, patterns are shifting. A report by the United Nations Conference on Trade and Development (UNCTAD) found that growth has slowed at these companies’ foreign affiliates, contributing to the slower expansion in global trade.7

The Factors Slowing Supply Chain Expansion

The term deglobalization is increasingly being used to describe the slowing of international trade and cross-border investment. Measured as a share of global gross domestic product (GDP), international trade doubled from 30 percent in 1973 to 60 percent in 2008, the year of the global financial crisis, according to Ruchir Sharma, Chief Global Strategist at Morgan Stanley Investment Management.8 However, that trend has reversed since the crisis, with the percentage dropping to 55 percent. “There are many reasons to expect that this new age of deglobalization will last,” he wrote in the New York Times9

Beyond broad global trends such as deglobalization, sluggish economic growth, mounting national protectionism, and declining commodity prices, analysts cite a range of business rationales behind the slowdown in global supply chain expansion. “The makers of many finished goods are beginning to place less importance on labor costs and more on speed to market and non-labor costs,” according to a report from the McKinsey Global Institute. “As a result, some production is moving closer to end consumers.” Global supply chains may also be shortening, in part, because of the sheer cost of managing complex, lengthy supply chains, the report says.10

Financial risk is another factor, according to BIS. “These more intricate production structures require more, and often more complex … cross-border financing, often in foreign currency. And longer production chains may involve more working capital and larger foreign currency exposures,” BIS said.11

In addition, it is likely that the development of global value chains has been facing declining returns, as “the low-hanging fruit had already been picked before the crisis,” according to the Business and Industry Advisory Committee (BIAC), a lobbying group. Generally, global supply chains are already widespread, “meaning that less scope exists for their future development.”12

Business automation and the growth of digital products and trade are also seen as factors affecting the future of global supply chains. “The digital economy is fundamentally changing the way firms produce and market goods and services across borders,” UNCTAD says. “Digital multinationals can communicate with and sell to customers overseas without the need for much physical investment in foreign markets.”13 Many multinational corporations are centralizing global functions and back-office operations using cloud computing, UNCTAD notes. The McKinsey report adds that new technologies such as 3D printing have the potential to transform how and where many types of goods are produced.

Structuring Global Supply Chains in a Changing Business Environment

Amid the evolving global political and business environment, companies may benefit from seeking opportunities where they can find cultural, administrative, political, geographic and economic affinities, says the HBR report. This may accelerate a trend toward regional rather than global sourcing, according to Jonathan Webb, Head of Strategy Research at Procurement Leaders, a market research firm. Countries may tend to trade more with their neighbors rather than distant trading partners, he says.14

The HBR report suggests that businesses analyzing their global supply chain strategies may seek to balance three fundamental options. Adaptation — tailoring products and services to suit local demand — can boost revenue and market share in individual countries. However, it also increases cost and complexity, and therefore needs to be balanced against aggregation — the economies of scale provided by reusing the same assets across regional or global markets. The third key consideration is arbitrage: how to take advantage of differences in national labor costs, taxation and other factors to minimize costs throughout the supply chain.

The Takeaway

Global supply chain expansion has plateaued in recent years, analysts say, for reasons ranging from global politics to international businesses’ desire to reduce complexity and accelerate time to market. Company executives are adjusting to the changing business environment by analyzing their supply chains to optimize the mix of local adaptation, global or regional aggregation and cross-border arbitrage.

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

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